Yield Curve and Monetary Policy in Nigeria: Investigating the Predictive Power of the Yield Curve

Abstract

This research paper examines the effectiveness of the yield spread in forecasting future economic activity and inflation in Nigeria. Quarterly data on GDP, Open Buy Back (OBB) Nigerian Treasury Bill (NTB), FGN Bond yields and inflation rates from 2010Q1 – 2020Q1 were employed in conducting this study. The Regression Model was used to establish the relationship among the variables of interest; the yield spread (10-year less 3-month bond) was used to predict output and inflation using the Dynamic and Static Forecasting Model. The projected variables, however, depicted co-movement between the actual and the forecasts in most of the periods. Nevertheless, the behavioral movement of the model was dissimilar at some points (2015-2017). Generally, the results indicated a significant predictive power of the yield spread in forecasting economic activities in the future as stipulated in the literature. The paper recommends the validity and use of the predictive information content embedded in the yield spread as a guide or signal for monetary policy actions and decisions.